Bodie: Plan your retirement portfolio for zero real return

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Lbill
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Bodie: Plan your retirement portfolio for zero real return

Post by Lbill » Fri Dec 30, 2011 12:30 pm

Long an advocate for minimizing risk in retirement investing, Zvi Bodie in his latest book "Risk less and Prosper" still recommends that investors follow this "safety first" plan:
1. Determine your minimum retirement income goal.
2. Determine your required savings rate based on assuming a 0% real rate of return (i.e., that you can match inflation but no more).
3. Consider working, at least part-time, beyond the conventional retirement age in order to achieve your retirement savings goal.
4. Your primary retirement investments should be TIPS and I-Bonds.
5. Add riskier investments, such as stocks, only if you are unable to meet your minimum retirement goal based on 1-4 above, and then add only the minimum allocation necessary. Recognize that, even though riskier investments might allow you to reach your retirement goal sooner, or even exceed your goal, there is a significant chance you can fall short of your goal and that this risk does not decrease over long-run investment horizons.

http://www.marketwatch.com/video/asset/ ... 1586E397A4
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Fri Dec 30, 2011 12:53 pm

From the video, Bodie concedes that most people are not high net worth. And therefore may not be able to save enough with "safe" investment vehicles. What to do? Bodie says you may have to work beyond your normal retirement age to maybe age 75, at least part time.

However, he does talk about "human capital" as being an important component in this process. Makes me think that employees may not have a lot of human capital remaining as they get older. Is this the way people envision how they will spend their Golden Years?
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by hlfo718 » Fri Dec 30, 2011 1:18 pm

My wife and I are trying to save as much as possible. Earlier this year when I told my wife her annual clothing budget has been cut to no more than $400 a year, she freaked out and was really p.ssed off. After she calmed down (a couple of days later), I asked her a simple question. Would you like to increase your clothing budget or retire an extra year early? She wisely picked retire early. :lol

I am somewhat following Bodie's advice on saving the retirement funds in TIPS but given the low real rate of return, is not optimistic we can retire early. :(

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by neverknow » Fri Dec 30, 2011 1:20 pm

What I like best about Z Bodie is his voice turns upside down the "take as much risk as you can tolerate, because - oh my!" mantra - and turns it into "how little of risk can one take, and still meet their goals?" No one else, that I know of is representing that way of thinking. I couldn't possibly guess which way of viewing things, going 30 years into the future will turn out to be a good thing, but I always appreciate alternate voices -- to prompt my own thinking, so I can decide for myself.

It is Bodie that prompted me to purchase both a 2032 and a 2040 individual TIP. Not ideal, as I obtained mine in the secondary market, but both a sure winner in 2011 -- and not for re sale.

Spend less then you earn, has always worked for me.
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Stonebr » Fri Dec 30, 2011 1:23 pm

Gee, I'm sure glad I didn't invest this way for the last 30 years. I'd still be working...
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by livesoft » Fri Dec 30, 2011 1:30 pm

It may be that Bodie has influenced the Fidelity Income Strategy Evaluator for retirement income/withdrawal planning. This tool is available for free via my Fidelity 401(k) and probably to all Fidelity account holders and maybe even non-account holders.

The methodology of Fidelity ISE is described here: http://personal.fidelity.com/planning/r ... dology.pdf
The tool calculates hypothetical income and asset projections
for each projection year in all market conditions (represented
by 0% return environment,
as well as the 25%, 50%, 75%, and
90% confidence levels).
I have bolded where the tool uses a 0% return environment and thus favors fixed annuities for a hefty portion of one's retirement income.
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Watty » Fri Dec 30, 2011 1:31 pm

A zero inflation adjusted return isn't all that radical. With a 4% safe withdrawal rate your nest egg would last 25 years instead of the normal target of 30 years. A 3.33% withdrawal rate would last 30 years. This would be about a 16% reduction in your retirement income.

The real problem though is that getting a 0% inflation adjusted after tax return on any money outside a retirement account without having investments like stocks is harder than it sounds since you will get taxed on any increases due to inflation

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by peppers » Fri Dec 30, 2011 1:38 pm

Mr. Steve Utkus has a blog on the Vanguard site. A recent post was about aging and financial skills. In short he states that on average financial skills peak at age 53. By age 60 the rate of dementia starts to double every five years and by age 75, 6% of the population will have dementia. Food for thought.
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Fri Dec 30, 2011 1:56 pm

I guess where I don't agree with Bodie is his premise. Bodie thinks that over the long term, stocks are not likely to offer a positive real return. So he would rather be resigned to match inflation.

His premise doesn't match historical stock market data. There were less than a handful of instances when systematically investing in stocks over, say, 20 years barely matched inflation. Here is one example. The following chart shows real values for contributing $1000 every year for 20 years. Click image for full size.

Image
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Grt2bOutdoors » Fri Dec 30, 2011 2:03 pm

Here is Grt2BOutdoors planning for retirement advice: "Save as much as you can without making yourself feel claustraphobic". There you go, no need to buy books, fret or philosiphize about it.
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by richard » Fri Dec 30, 2011 2:04 pm

bob90245 wrote:I guess where I don't agree with Bodie is his premise. Bodie thinks that over the long term, stocks are not likely to offer a positive real return. So he would rather be resigned to match inflation.

His premise doesn't match historical stock market data. There were less than a handful of instances when systematically investing in stocks over, say, 20 years barely matched inflation. Here is one example. The following chart shows real values for contributing $1000 every year for 20 years. Click image for full size.
How many independent 20 year periods of data do we have whose characteristics match today and those that will be in effect for the next 50 years (or whatever your relevant time span might be)?

Even if you believe stocks are likely to offer positive real return, what will you do if they don't?

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by richard » Fri Dec 30, 2011 2:07 pm

Stonebr wrote:Gee, I'm sure glad I didn't invest this way for the last 30 years. I'd still be working...
You made a bet and won. Does that mean gambling is a good idea?

It might be if you have an effective strategy in case you lose.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by mamster » Fri Dec 30, 2011 2:08 pm

bob90245 wrote:I guess where I don't agree with Bodie is his premise. Bodie thinks that over the long term, stocks are not likely to offer a positive real return. So he would rather be resigned to match inflation.
I've interviewed Bodie a number of times, and this is absolutely not what he believes. Like nearly everyone here, he believes there's a relationship between risk and expected returns, and that stocks have higher expected returns than bonds. In Risk Less and Prosper, he suggests that people in a variety of situations consider owning stocks.

Money you put in stocks is at risk. "Risk" means that you might fall far short of your expected return on that money, and short of the return you would have gotten on TIPS. If you don't believe that can happen in "the long run," you slept through 2008. All Bodie is saying is that risk is real, it's not just a buzzword; you shouldn't take more risk than you can handle; and it's better to save more than take more financial risk. Why that should be controversial here, I don't know.

As Bodie put it last time I spoke with him (I'm paraphrasing): if you don't like the return you get from TIPS, imagine how much you're going to hate the return you get from stocks if risk shows up at the worst time.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by nisiprius » Fri Dec 30, 2011 2:16 pm

How much of this comes down to "shoot the messenger?" "I don't agree with Bodie because what he is saying can't be true, because it's so unpleasant?"
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by richard » Fri Dec 30, 2011 2:17 pm

mamster wrote:As Bodie put it last time I spoke with him (I'm paraphrasing): if you don't like the return you get from TIPS, imagine how much you're going to hate the return you get from stocks if risk shows up at the worst time.
That's the issue. If you invest in something that should (but is not certain) to earn more than TIPS, there is the very real chance it will earn less than TIPS.

One problem is the lack of a good investment to hold in a taxable account that will protect against inflation after taxes.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by letsgobobby » Fri Dec 30, 2011 2:19 pm

people should take risks in stocks because they need to. Most retirees need to take some stock risk; they do not have enough saved to take an all TIPS approach. They should probably use more annuities but everyone knows that.

It's easy to say, "take less risk" but less easy to figure out how to fund retirement that way.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Lbill » Fri Dec 30, 2011 2:28 pm

I think Bodie does a good job of describing the "rock and a hard place" dilemma faced by most of us. On the one hand is the worry about the future value of our "human capital" if we get bumped from our working career way sooner than planned, the worry about being able to save enough assuming 0% real returns on our investments. But, unfortunately, the primary remedy for 0% returns is to take on risk - in the form of relatively high stock allocations for most of us. The remedy is not guaranteed to work, no matter how long your time horizon. Although the odds (based on history) seem in favor of winning the risk game, there is a non-trivial risk that you will end up even worse off - a situation described as a "Morton's Fork".
Morton's Fork is a choice between two equally unpleasant alternatives (in other words, a dilemma), or two lines of reasoning that lead to the same unpleasant conclusion. It is analogous to the expressions "between the devil and the deep blue sea," "between a rock and a hard place," or, as those in the Spanish-speaking world say, "between a sword and a wall.
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by HomerJ » Fri Dec 30, 2011 2:29 pm

richard wrote:
Stonebr wrote:Gee, I'm sure glad I didn't invest this way for the last 30 years. I'd still be working...
You made a bet and won. Does that mean gambling is a good idea?

It might be if you have an effective strategy in case you lose.
The bet seems to be a good one...

Here are two choices...

(1) Invest in 100% safe bonds, work until 65 and get a part-time job from 65-75 - 100% chance of working until 75.
(2) Invest 50%/50% stocks/bonds with an 70% chance that you'll get to retire at 55-60, 20% chance that you'll get to retire at 65, and a 10% chance that you'll never retire.

(yep, I just made up all those numbers in #2).

I say the right answer is to just save a ton... 50/50 stocks/bonds... Save enough so if stocks return 0% or a negative 25% over 30 years, you can still retire at 65 with a part-time job or reduced standard of living.... However, the odds are very good that you'll see positive real return on stocks, and you'll retire early and/or with a high standard of living.

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Post by bobcat2 » Fri Dec 30, 2011 2:35 pm

mamster wrote:
bob90245 wrote:I guess where I don't agree with Bodie is his premise. Bodie thinks that over the long term, stocks are not likely to offer a positive real return. So he would rather be resigned to match inflation.
I've interviewed Bodie a number of times, and this is absolutely not what he believes. Like nearly everyone here, he believes there's a relationship between risk and expected returns, and that stocks have higher expected returns than bonds. In Risk Less and Prosper, he suggests that people in a variety of situations consider owning stocks.

Money you put in stocks is at risk. "Risk" means that you might fall far short of your expected return on that money, and short of the return you would have gotten on TIPS. If you don't believe that can happen in "the long run," you slept through 2008. All Bodie is saying is that risk is real, it's not just a buzzword; you shouldn't take more risk than you can handle; and it's better to save more than take more financial risk. Why that should be controversial here, I don't know.

As Bodie put it last time I spoke with him (I'm paraphrasing): if you don't like the return you get from TIPS, imagine how much you're going to hate the return you get from stocks if risk shows up at the worst time.
Here is Robert Powell interviewing Zvi Bodie about Bodie's new book, "Risk Less and Prosper". The interview certainly squares with Mamster's characterization of the advice in the book.
http://www.marketwatch.com/video/asset/ ... 1586E397A4

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by umfundi » Fri Dec 30, 2011 2:38 pm

mamster wrote:imagine how much you're going to hate the return you get from stocks if risk shows up at the worst time.
Ah, yes. The monster under the bed scenario.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Fri Dec 30, 2011 3:02 pm

mamster wrote:
bob90245 wrote:I guess where I don't agree with Bodie is his premise. Bodie thinks that over the long term, stocks are not likely to offer a positive real return. So he would rather be resigned to match inflation.
I've interviewed Bodie a number of times, and this is absolutely not what he believes.
Then I don't understand why he says to reach your minimum retirement goals, you must first put your savings into safe vehicles.
mamster wrote:Money you put in stocks is at risk. "Risk" means that you might fall far short of your expected return on that money, and short of the return you would have gotten on TIPS.
I guess you didn't believe me when I said this doesn't match historical stock data. Over 20 year periods of systematic stock market investing, there were less than a handful of times when a positive real return was not acheived. And in none of those instances was the result "far short".

Now for someone who believes that stocks will earn a return far short of inflation over their investing lifetime, I would not argue that they shouldn't put the savings it "safe" vehicles. I just think that is highly unlikely.

And I would further argue that if stocks indeed fall far short of inflation over the next 20 years, we would have lived in a stagnated economy. And in that situation, you will have concerns far greater than the size of your portfolio. Like maybe a 20-year stagnant economy might weaken the Federal Government to the point that it can no longer afford to offer inflation-protected securities.
Last edited by bob90245 on Fri Dec 30, 2011 3:09 pm, edited 3 times in total.
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Wagnerjb » Fri Dec 30, 2011 3:03 pm

rrosenkoetter wrote:
richard wrote:
Stonebr wrote:Gee, I'm sure glad I didn't invest this way for the last 30 years. I'd still be working...
You made a bet and won. Does that mean gambling is a good idea?

It might be if you have an effective strategy in case you lose.
The bet seems to be a good one...

Here are two choices...

(1) Invest in 100% safe bonds, work until 65 and get a part-time job from 65-75 - 100% chance of working until 75.
(2) Invest 50%/50% stocks/bonds with an 70% chance that you'll get to retire at 55-60, 20% chance that you'll get to retire at 65, and a 10% chance that you'll never retire.
I agree with you, although I suspect the chance that you don't get to retire is pretty tiny. The "risk" in stocks that Bodie talks about is the risk that stocks won't generate a return that is appropriate for the volatility (or risk) you are taking. But the data seems to show very clearly that historically, stocks have beaten bonds over long (30 years) periods of time. If you take equity risk and generate a real return of 1%, won't you nonetheless be happy to be able to retire earlier than your neighbor who was in 100% TIPs? Not to mention the extra alpha you generated from tax loss harvesting the equities, not paying income taxes on your annual interest income, donating appreciated shares, etc.

The risk of losing money - in real terms - is nonetheless one that we cannot ignore. For that reason, we don't invest in stocks unless we have a long time horizon. And...we also invest in bonds. And....we invest globally.

Best wishes.
Andy

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by nisiprius » Fri Dec 30, 2011 3:17 pm

bob90245 wrote:I guess you didn't believe me when I said this doesn't match historical stock data. Over 20 year periods of systematic stock market investing, there were less than a handful of times when a positive real return was acheived. And in none of those instances was the result "far short".
For the 17-year period from 1966-1982, the real return from stocks was almost precisely zero (very slightly negative), BUT that does not include the effect of taxes. Inflation over that time almost precisely tripled, and so did the nominal value of a stock market investment. So anyone holding stocks over that time period was taxed on a 200% nominal gain. I'm not sure what the math on taxation would be, but I'm pretty sure it means that returns after taxes were far short of inflation. It wouldn't have been as bad for a 20-year period. And the effect of inflation and taxes was equally horrific on all other investments.

Note that IRAs didn't exist until 1974, 401(k)s didn't exist until about 1980.

So, it was just a generally bad period for everything, but it still means that for planning purposes, it would be prudent to assume that stock market returns after taxes could fall quite short of a 0% real return over a two-decade period. It happened once, it could happen again.

P.S. For twenty-year periods, it appears as if the real return for the twenty-year period 1962 through 1981 inclusive was a total of about 18.4%, cumulative, over the whole 20 years, or about 0.84% annualized. That means that stocks gained 18.4% real, but they gained and were taxed on a total gain of 270%. Not sure how the tax math on that works, but I think it would be a significant real loss after taxes.
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Christine_NM » Fri Dec 30, 2011 3:40 pm

umfundi wrote:
mamster wrote:imagine how much you're going to hate the return you get from stocks if risk shows up at the worst time.
Ah, yes. The monster under the bed scenario.

Keith
There are at least two monsters under the bed. Imagine how you would feel retired on tight budget with an all-bond portfolio during a roaring bull market for stocks. That feeling makes a person more vulnerable to buying stocks at the wrong time.

I can't find anything better than a value-tilted, age-in-bonds portfolio for surviving all conditions and giving me the feeling that no matter what is in style, I already own a bit of it so I'm not tempted to dabble.

The jury is out on Bodie until we see what happens with rising interest rates.
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by VictoriaF » Fri Dec 30, 2011 3:48 pm

hlfo718 wrote:My wife and I are trying to save as much as possible. Earlier this year when I told my wife her annual clothing budget has been cut to no more than $400 a year, she freaked out and was really p.ssed off. After she calmed down (a couple of days later), I asked her a simple question. Would you like to increase your clothing budget or retire an extra year early? She wisely picked retire early. :lol
Your wife lives in NYC, and you cajoled her to the clothing budget of $400?! This is the most preposterous message I have seen in this Forum.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by soaring » Fri Dec 30, 2011 4:07 pm

VictoriaF wrote:
hlfo718 wrote:My wife and I are trying to save as much as possible. Earlier this year when I told my wife her annual clothing budget has been cut to no more than $400 a year, she freaked out and was really p.ssed off. After she calmed down (a couple of days later), I asked her a simple question. Would you like to increase your clothing budget or retire an extra year early? She wisely picked retire early. :lol
Your wife lives in NYC, and you cajoled her to the clothing budget of $400?! This is the most preposterous message I have seen in this Forum.

Victoria
Well we don't live in NYC but throughout our working career we never spent $400 in a year combined...well maybe a year or two but the next was much less since we stocked up the previous year on a specific we liked. Both of us worked in offices and I was on the road too (daily local). So it can be done easily. We never thought we did without either....we didn't do without.
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by frose2 » Fri Dec 30, 2011 4:14 pm

In America, the idea of assuming 0% return max on financial assets makes tremendous sense to me. The idea of focusing your portfolio on TIPS still seems wrong to me because of CPI fraud, but I have to admit that TIPS have done well.

The problem for Americans is that they still can't retire, even being so conservative, because Medicare is going down the tubes, and without Medicare, your first serious health problem will bankrupt you. My answer to Bodie would be: if you live in America and realistically want to retire, you must work for the government. There is no alternative.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by awval999 » Fri Dec 30, 2011 4:28 pm

Christine_NM wrote:
umfundi wrote:
mamster wrote:imagine how much you're going to hate the return you get from stocks if risk shows up at the worst time.
Ah, yes. The monster under the bed scenario.

Keith
There are at least two monsters under the bed. Imagine how you would feel retired on tight budget with an all-bond portfolio during a roaring bull market for stocks. That feeling makes a person more vulnerable to buying stocks at the wrong time.

I can't find anything better than a value-tilted, age-in-bonds portfolio for surviving all conditions and giving me the feeling that no matter what is in style, I already own a bit of it so I'm not tempted to dabble.

The jury is out on Bodie until we see what happens with rising interest rates.
This. God I can't wait until another bull market so this end of the world, death of equities crap is over. You know what, I think we all should invest with the idea of negative 3% returns. Because we all know stocks and bonds are frauds and the big-bad government lies about CPI/inflation.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Beagler » Fri Dec 30, 2011 5:34 pm

jenny345 wrote:...In a book I'm reading called Sustainable Planet, Vicki Robbins (Your Money or Your Life) states she lives in a house with 4 other adults and they grow their own food. Five people on Medicare and Social Security could probably live quite well like that.
No, thanks. That's not how I define "taking care of my family." We'll stick with the single-family home with the white picket fence. We do maintain an herb garden, but will most certainly not be giving up on our favorite restaurants.

Best of luck to those who opt for communal housing.
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by letsgobobby » Fri Dec 30, 2011 6:13 pm

jenny345 wrote:
letsgobobby wrote:people should take risks in stocks because they need to. Most retirees need to take some stock risk; they do not have enough saved to take an all TIPS approach. They should probably use more annuities but everyone knows that.

It's easy to say, "take less risk" but less easy to figure out how to fund retirement that way.
If they don't have enough saved to take an all TIPS approach, then they really don't have enough saved if the market has a prolonged dip right when they are ready to retire.

It is actually easy to figure out how to do it. It is just that most people don't want to. You have to live below your means and save more money or figure out how to live on Social Security alone, which might mean group housing or living in an mobile home, something that goes against the grain for many people. In a book I'm reading called Sustainable Planet, Vicki Robbins (Your Money or Your Life) states she lives in a house with 4 other adults and they grow their own food. Five people on Medicare and Social Security could probably live quite well like that.
you sound very out of touch with reality. Of course many people could and should save more but I am persuaded by the data that suggests the major expenses of middle class life - housing, education, and health care - are vastly more expensive now in real terms than they were a generation ago and it is not a myth that it is 'much harder' to save for retirement than it used to be. Besides, your argument (that if you don't have enough to have a 100% TIPS retirement portfolio then you haven't saved enough) could be extended to the accumulation phase as well: "If you have to rely on any growth whatsoever then you aren't saving enough." Hogwash. That's not realistic for almost anyone; it relies on everyone saving exactly as much as they spend every year, and I bet even most Bogleheads aren't doing that.

Most people need to take some equity risk. There is little you can do to control whether that risk will pay off or not so it is best to take only the risk you need. But this "the world will be at 0% real returns forever" stuff is rather recency-biased, I feel. In fact the longer this goes on and the more people scream about this, the more confident I become that we will soon revert to a more normal period of solid equity appreciation.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by DaleMaley » Fri Dec 30, 2011 6:15 pm

Bodie is a university professor who advocates working until you are dead.

See the previous posting for further discussion and the link to the video where he recommends working until you are dead:

http://www.bogleheads.org/forum/viewtopic.php?p=752690
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bob90245
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Fri Dec 30, 2011 7:06 pm

nisiprius wrote:
bob90245 wrote:I guess you didn't believe me when I said this doesn't match historical stock data. Over 20 year periods of systematic stock market investing, there were less than a handful of times when a positive real return was acheived. And in none of those instances was the result "far short".
For the 17-year period from 1966-1982, the real return from stocks was almost precisely zero (very slightly negative), BUT that does not include the effect of taxes. Inflation over that time almost precisely tripled, and so did the nominal value of a stock market investment. So anyone holding stocks over that time period was taxed on a 200% nominal gain. I'm not sure what the math on taxation would be, but I'm pretty sure it means that returns after taxes were far short of inflation. It wouldn't have been as bad for a 20-year period. And the effect of inflation and taxes was equally horrific on all other investments.

Note that IRAs didn't exist until 1974, 401(k)s didn't exist until about 1980.

So, it was just a generally bad period for everything, but it still means that for planning purposes, it would be prudent to assume that stock market returns after taxes could fall quite short of a 0% real return over a two-decade period. It happened once, it could happen again.
You've seemed to stray from my main point and want to look at taxes. I don't disagree, there.

But to repeat my main point. Let's assume you are 45 years old, saved nothing and decided just today to start using your 401k plan with the goal of retiring in 20 years. You make $50,000 and can affored to save 20% a year, which would be $10,000 a year. And let's assume your salary and $10,000 401k contributions will rise to keep pace with inflation.

You have a choice. You can follow the Bodie plan and use inflation-protected vehicles, earn a 0% real rate and have the equivalent of $200,000 in today's dollars when you reach age 65. Or you can follow some other investment plan which includes funds diversifying according to US, international, value, small cap, and bonds. Being conservative, you think you should have 60% in bonds. Is it likely that the more diversfied portfolio will merely match, or even fall short of, the Bodie plan?

If your answer is yes, how likely is it that the Federal Government will be strong enough to continue offering inflation-protected securities? These two questions are tightly related!
Last edited by bob90245 on Fri Dec 30, 2011 7:11 pm, edited 1 time in total.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by getRichSlower » Fri Dec 30, 2011 7:07 pm

nisiprius wrote:How much of this comes down to "shoot the messenger?" "I don't agree with Bodie because what he is saying can't be true, because it's so unpleasant?"
I'm doubt that working until you're 75 is a viable solution for the average case. If you're blue collar, then your body goes downhill and you can't do the same manual labor anymore. If you're white collar, some percentage of people have dementia by 75 and many others will have a decline in cognitive abilities. How many jobs don't require physical strength or intelligence but still pay decent?

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Wagnerjb » Fri Dec 30, 2011 7:27 pm

bob90245 wrote:But to repeat my main point. Let's assume you are 45 years old, saved nothing and decided just today to start using your 401k plan with the goal of retiring in 20 years. You make $50,000 and can affored to save 20% a year, which would be $10,000 a year. And let's assume your salary and $10,000 401k contributions will rise to keep pace with inflation.

You have a choice. You can follow the Bodie plan and use inflation-protected vehicles, earn a 0% real rate and have the equivalent of $200,000 in today's dollars when you reach age 65. Or you can follow some other investment plan which includes funds diversifying according to US, international, value, small cap, and bonds. Being conservative, you think you should have 60% in bonds. Is it likely that the more diversfied portfolio will merely match, or even fall short of, the Bodie plan?
While I disagree with much of Bodie's advice (it is too conservative IMO), in this particular circumstance his advice is better than much of what you will hear from an advisor. The advisor will suggest to this ficticious 45-year old that he can indeed retire when he wants...and spend at his target spending....as long as he vastly ramps us his risk and makes a huge reach for a (for example) 12% portfolio return. Of course, the advisor meets his goals, but the 45-year old chasing performace typically doesn't.

In this case, Bodie's advice of 1) assuming a 0% real return and 2) planning on working longer is definitely the superior plan for this 45-year old. It isn't what the 45-year old wants to hear, but he needs to get the message that there is no free lunch and those without discipline and willpower won't retire when they want.

Best wishes.
Andy

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by momar » Fri Dec 30, 2011 7:31 pm

So the only options are investing for a guaranteed 0% return or reaching for 12% (or more)?

Sorry, that's not true. Just because bad advisors exist doesn't mean 95% of people should be just trying to preserve their severely limited capital.
"Index funds have a place in your portfolio, but you'll never beat the index with them." - Words of wisdom from a Fidelity rep

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by umfundi » Fri Dec 30, 2011 8:18 pm

Let's assume you are 45 years old, saved nothing and decided just today to start using your 401k plan with the goal of retiring in 20 years.
Right. A recipe for success. Every day, people go from spending every penny to saving 25%

What causes the light switch to flip? Can you reduce your standard of living (spending) by 25% tomorrow and forever?

Don't get me wrong, it's the thing to do. But, it is not flipping a switch.

Keith
Déjà Vu is not a prediction

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Fri Dec 30, 2011 8:24 pm

Wagnerjb wrote:While I disagree with much of Bodie's advice (it is too conservative IMO), in this particular circumstance his advice is better than much of what you will hear from an advisor. The advisor will suggest to this ficticious 45-year old that he can indeed retire when he wants...and spend at his target spending....as long as he vastly ramps us his risk and makes a huge reach for a (for example) 12% portfolio return. Of course, the advisor meets his goals, but the 45-year old chasing performace typically doesn't.

In this case, Bodie's advice of 1) assuming a 0% real return and 2) planning on working longer is definitely the superior plan for this 45-year old. It isn't what the 45-year old wants to hear, but he needs to get the message that there is no free lunch and those without discipline and willpower won't retire when they want.
In your example of taking advice for the huge reach for 12% annual returns, I agree! I don't think you will hear that advice from anyone here on the Bogleheads forum.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by letsgobobby » Fri Dec 30, 2011 8:54 pm

jenny345 wrote:
Beagler wrote:
jenny345 wrote:...In a book I'm reading called Sustainable Planet, Vicki Robbins (Your Money or Your Life) states she lives in a house with 4 other adults and they grow their own food. Five people on Medicare and Social Security could probably live quite well like that.
No, thanks. That's not how I define "taking care of my family." We'll stick with the single-family home with the white picket fence. We do maintain an herb garden, but will most certainly not be giving up on our favorite restaurants.

Best of luck to those who opt for communal housing.
You took my quote out of context. I am not advocating communal housing. I was just pointing out that the average person doesn't need stocks to retire. You can save more and/or cut your expenses to the point where you can live off TIPS returns + Social Security + pensions. Vicki Robins is an extreme example of cutting expenses. In the book I''m reading she lives in a house in Seattle overlooking the Cascade mountains, has health insurance, and has multiple gardens on the property where she and her housemates grow their own food. It is one end of the saving continuum while the Audi commercials are at the other end. Many people could save a bigger percent of their incomes just by moving down the continuum away from the Audi for Christmas end.

If you absolutely need stocks for growth in order to retire and maintain your minimal retirement lifestyle, what is your plan B if stocks go down or stay flat instead? Communal housing?
again, you are living in dreamland. You realistically - honestly - not ideologically - believe that the Average American can retire with a zero risk portfolio? At the very low end or the very high end, maybe. Not for the broad middle. Not within enormous changes in what is understood to be quality of life shared by most Americans, if not by you.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Stonebr » Fri Dec 30, 2011 9:05 pm

richard wrote:
Stonebr wrote:Gee, I'm sure glad I didn't invest this way for the last 30 years. I'd still be working...
You made a bet and won. Does that mean gambling is a good idea?

It might be if you have an effective strategy in case you lose.
Since when is owning a business or a portfolio of businesses betting?

I have always objected to the use of gambling terminology with respect to investments. I never gamble and I've never seen the connection between gambling and investing.

Bodie is the kind of nerd that gets publicity during bear markets.
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by brick-house » Fri Dec 30, 2011 9:08 pm

bob92045 wrote:
But to repeat my main point. Let's assume you are 45 years old, saved nothing and decided just today to start using your 401k plan with the goal of retiring in 20 years. You make $50,000 and can affored to save 20% a year, which would be $10,000 a year. And let's assume your salary and $10,000 401k contributions will rise to keep pace with inflation.

You have a choice. You can follow the Bodie plan and use inflation-protected vehicles, earn a 0% real rate and have the equivalent of $200,000 in today's dollars when you reach age 65. Or you can follow some other investment plan which includes funds diversifying according to US, international, value, small cap, and bonds. Being conservative, you think you should have 60% in bonds. Is it likely that the more diversfied portfolio will merely match, or even fall short of, the Bodie plan?
Let's assume a 45 year old in January, 1997 when TIPS were first issued in U.S. Would that now 61 year old be better off having followed Bodie or the stock heavy approach?

Looking forward to reading the book, but like the message of saving more and expecting nothing...
You don't need no gypsy to tell you why- Greg Allman

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by richard » Fri Dec 30, 2011 9:09 pm

letsgobobby wrote:again, you are living in dreamland. You realistically - honestly - not ideologically - believe that the Average American can retire with a zero risk portfolio? At the very low end or the very high end, maybe. Not for the broad middle. Not within enormous changes in what is understood to be quality of life shared by most Americans, if not by you.
What happens to the average American with a risky portfolio when the risk manifests?

The average American family has a net worth about $240,00, including primary residence, at age 65. That doesn't generate a lot of cash flow from investments. The average American is retiring on Social Security (and Medicare), which is essentially risk free.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by Lbill » Fri Dec 30, 2011 9:20 pm

For the 17-year period from 1966-1982, the real return from stocks was almost precisely zero (very slightly negative)
....and for the 13-year period 1999-2011 we have about a zero real return from stocks (and counting). Fortunately, I was TIPPED off.
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by bob90245 » Fri Dec 30, 2011 9:38 pm

brick-house wrote:bob92045 wrote:
But to repeat my main point. Let's assume you are 45 years old, saved nothing and decided just today to start using your 401k plan with the goal of retiring in 20 years. You make $50,000 and can affored to save 20% a year, which would be $10,000 a year. And let's assume your salary and $10,000 401k contributions will rise to keep pace with inflation.

You have a choice. You can follow the Bodie plan and use inflation-protected vehicles, earn a 0% real rate and have the equivalent of $200,000 in today's dollars when you reach age 65. Or you can follow some other investment plan which includes funds diversifying according to US, international, value, small cap, and bonds. Being conservative, you think you should have 60% in bonds. Is it likely that the more diversfied portfolio will merely match, or even fall short of, the Bodie plan?
Let's assume a 45 year old in January, 1997 when TIPS were first issued in U.S. Would that now 61 year old be better off having followed Bodie or the stock heavy approach?
Have no idea. But does it really matter? You can't buy past returns.

What I want you and others reading here is to put yourself into my hypothetical 45 year old's shoes who has decided to start investing today. So if you want to be specific, start in January 2012 and continue all the way to December 2031. That's 20 years.

Ask yourself, will the US and world economy and corporations operating in it be sufficiently productive to provide real profits and real returns to investors (greater than inflation) all the way out to December 2031? And if not, is it likely that the US government will have the means necessary to continue offering inflation-protective securities at that time in the future?
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by KarlJ » Fri Dec 30, 2011 9:48 pm

The Bodie video seems very reasonable. Match future minimum essential living expenses in retirement with I-Bonds and TIPs, and then invest any excess after minimum future expenses have been met in the stock market via index funds. No mention of using LEAP SPY options for the stock market investments, which I feel Bodie has not fully explained, especially the performance claims.

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by DA » Sat Dec 31, 2011 7:48 am

Christine_NM wrote:I can't find anything better than a value-tilted, age-in-bonds portfolio for surviving all conditions and giving me the feeling that no matter what is in style, I already own a bit of it so I'm not tempted to dabble.
Perfect!

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by brick-house » Sat Dec 31, 2011 7:58 am

bob 92045 wrote:
Have no idea. But does it really matter? You can't buy past returns.
Then why so much emphasis on stock heavy portfolios. Aren't the expected return projections based on past returns which may or may not repeat?
Ask yourself, will the US and world economy and corporations operating in it be sufficiently productive to provide real profits and real returns to investors (greater than inflation) all the way out to December 2031?
It is a pertinent question since I am 40 years old. I have also asked myself how much volatility (as a whole, not asset classes in isolation) I can stomach. I have also asked myself if a stock heavy portfolio gets safer or riskier over time. The answers led me to focus on what I can control which is my human capital, savings rate, low cost investments, tax efficiency, and personal balance sheet. The answers also led me to adopt the Permanent Portfolio for 75% of my holdings while 25% goes to a Variable Portfolio.
And if not, is it likely that the US government will have the means necessary to continue offering inflation-protective securities at that time in the future?
Sounds like human capital will be pretty important in that scenario, plus gold and cash might be a good bet in that scenario... :D
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by VictoriaF » Sat Dec 31, 2011 9:07 am

letsgobobby wrote:
jenny345 wrote:
Beagler wrote:
jenny345 wrote:...In a book I'm reading called Sustainable Planet, Vicki Robbins (Your Money or Your Life) states she lives in a house with 4 other adults and they grow their own food. Five people on Medicare and Social Security could probably live quite well like that.
No, thanks. That's not how I define "taking care of my family." We'll stick with the single-family home with the white picket fence. We do maintain an herb garden, but will most certainly not be giving up on our favorite restaurants.

Best of luck to those who opt for communal housing.
You took my quote out of context. I am not advocating communal housing. I was just pointing out that the average person doesn't need stocks to retire. You can save more and/or cut your expenses to the point where you can live off TIPS returns + Social Security + pensions. Vicki Robins is an extreme example of cutting expenses. In the book I''m reading she lives in a house in Seattle overlooking the Cascade mountains, has health insurance, and has multiple gardens on the property where she and her housemates grow their own food. It is one end of the saving continuum while the Audi commercials are at the other end. Many people could save a bigger percent of their incomes just by moving down the continuum away from the Audi for Christmas end.

If you absolutely need stocks for growth in order to retire and maintain your minimal retirement lifestyle, what is your plan B if stocks go down or stay flat instead? Communal housing?
again, you are living in dreamland. You realistically - honestly - not ideologically - believe that the Average American can retire with a zero risk portfolio? At the very low end or the very high end, maybe. Not for the broad middle. Not within enormous changes in what is understood to be quality of life shared by most Americans, if not by you.
The problem with this chain of messages -- apart from letsgobobby's incivility in violation of this Forum's rules -- is that it conflates several different scenarios.

A poster jenny345 says that people can live frugally if they like to (e.g., Vicki Robbins) or have to (e.g., they have limited assets and cannot work any longer).

A poster Beagler argues with jenny345's general statements by using his own preferences -- without providing any information on how his particular example is relevant to those who like to or have to live frugally.

A poster letsgobobby -- apart from his incivility in violation of this Forum's rules -- introduces ideology, also in violation of this Forum's rules, to attack jenny345's statements and by extension those of Zvi Bodie.


The key to this chain of messages is that the arguments that apply to the general population of Americans whose statistics of spending and saving are fairly well known, are not the same arguments that apply to anonymous Internet posters whose financial situations and choices are not known. Furthermore, individual posters can take risks with their own portfolios, outcomes of such risks will not be known for years to come, and these posters will bear the consequences of their risks themselves. On the other hand, general recommendations, as those provided by Bodie, aim to reduce risks to the population as a group, because the population as a group does not understand risks and cannot manage risks when they arise.

Victoria
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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by saurabhec » Sat Dec 31, 2011 9:36 am

richard wrote:
Even if you believe stocks are likely to offer positive real return, what will you do if they don't?
You seem to have forgotten about the existence of programs like social security and medicare. Even if ones savings were to be zero outside of those programs, it would ensure at least a bare bones existence. Plenty of retirees are living on just those two programs. Even in the great depression the stock market did not go to zero. A balanced portfolio of stocks and bonds should at least have a decent chance of keeping even with inflation even in an adverse scenario. I

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by beardsworth » Sat Dec 31, 2011 10:41 am

jenny345 wrote:I don't know why you have to include the personal attacks like "living in dreamland" and "out of touch with reality." It would be great if we could have a nice discussion here exploring different viewpoints without the insults.
Agree with you there, jenny345. The language used toward your viewpoint was gratuitous and offensive, and I hope you'll be receiving an apology before long.
jenny345 wrote:The average baby boomer isn't prepared for retirement no matter what they invest in. . . . They basically are going to be retiring on Social Security and Medicare and not a whole lot else anyway, as another poster pointed out. . . . I still think it is valid to ask, If you absolutely need stocks for growth in order to retire and maintain your minimal retirement lifestyle, what is your plan B if stocks go down or stay flat instead? What do you do if you are 70, you gambled and lost in stocks and now you can't maintain your minimal retirement lifestyle?
And I tend to agree with you, and with Bodie, that if people don't have enough saved in relatively stable/safe vehicles, then they probably don't have enough to retire. Stocks––whatever their level of performance over long periods of time––can never absolutely be relied upon at a particular point in time. People who were heavily invested in stocks and reduced their holdings to retire in 1999, for example, were sitting pretty. People who were forced to do the same in 2000 were in trouble. . . . I think of safe investments as the "main course" and riskier investments as the "sauce." You can live on the former––if you have enough of it––but not reliably and smoothly on the latter.

Marc

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Re: Bodie: Plan your retirement portfolio for zero real retu

Post by 555 » Sat Dec 31, 2011 11:11 am

MarcMyWord wrote:People who were heavily invested in stocks and reduced their holdings to retire in 1999, for example, were sitting pretty. People who were forced to do the same in 2000 were in trouble. . . .
But they are in exactly the same situation, except that the latter has one more year's income.

EDIT: Oh wait, I missed a crucial point in your post.
MarcMyWord wrote:And I tend to agree with you, and with Bodie, that if people don't have enough saved in relatively stable/safe vehicles, then they probably don't have enough to retire. Stocks––whatever their level of performance over long periods of time––can never absolutely be relied upon at a particular point in time. People who were heavily invested in stocks and reduced their holdings to retire in 1999, for example, were sitting pretty. People who were forced to do the same in 2000 were in trouble. . . . I think of safe investments as the "main course" and riskier investments as the "sauce." You can live on the former––if you have enough of it––but not reliably and smoothly on the latter.
The real point in your post is not to do with the riskiness of stocks. Instead the real point in your post is to do with the far greater risk of making a large sudden shift in asset allocation. Why would someone do that? It is more prudent to follow a gradual glide path, so you are not dependant on such timing.
Last edited by 555 on Sat Dec 31, 2011 11:46 am, edited 1 time in total.

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